1 Chapter 6 Motivation Concepts MRS. Shefa EL Sagga. 14/4/2011OB.
Shefa Gems (Shefa Yamim)...the report the current marketing strategy and use of SEFA gemstones by...
Transcript of Shefa Gems (Shefa Yamim)...the report the current marketing strategy and use of SEFA gemstones by...
#VSA Capital acts as Financial Advisor and Joint Broker to Shefa Yamim. This research brochure is a MARKETING COMMUNICATION. It is not investment research and has not been prepared in accordance with legal requirements
designed to promote investment research independence and is also not subject to any prohibition on dealing ahead of dissemination of investment research.
4 June 2019 METALS & MINING
Flashnote Marketing Communication (Connected Research)
Shefa Gems (Shefa Yamim)# BBG Ticker: SEFA LN Price: 4.75p/sh. Mkt Cap: £7.95m Speculative Buy
From Mine to Market
Economic Evaluation Confirms Low Cost Mining
Shefa Gems (Shefa Yamim) (SEFA LN)# recently announced raising gross proceeds of £1m which is expected to be sufficient to significantly advance the company through mine licensing and to the start of mining and product sales. This follows the publication of a Technical Economic Evaluation (TEE) which demonstrated low operating and capital costs. The TEE considered both contract and owner-operated mining with LoM capital of US$7.5m and US$11.3m, and operating costs of US$27/t and US$26/t respectively assuming no existing equipment. However, given the investment in equipment post IPO the current plant capacity is 50tph and therefore the required investment ahead of commercial mining is likely to be considerably lower which along with the recent fundraise substantially reduces the financing risk.
Independent Gem Stone Valuation
An independent and experienced gemmologist has provided valuations for gem quality examples of SEFA stones from the Gembox suite. SEFA’s unique Carmel Sapphire™ was valued at US$5,000/ct to US$7,000/ct for black and blue cabochons respectively and US$10,000/ct for rough, uncut Natural Moissanite™. Based on grades to date from zone one bulk sampling we have established a basket price for the Gembox of US$1,500/ct which combined with the results of the TEE produces a DCF based NPV10 of US$331m.
Given the unique nature of the strategy we have also analysed the asset on a non-integrated basis. A minimum revenue of US$31/ct is required to make the project breakeven which represents a modest hurdle well below the anticipated value and should demonstrate to investors both the significant potential for strong margins as well as the robust nature of the project to cope with variability in terms of grade and stone quality over the LoM.
Advancing the Mine to Market Strategy
Renowned jewellery designer Yossi Harrari launched a collection of unique handmade 24k gold jewellery using stones from the Kishon Mid Reach with pieces ranging in value from US$1,000-US$85,000 confirming the Independent Valuation report, particularly in relation to the Carmel Sapphire™ and Natural Moissanite™.
Recommendation
With the additional funding to SEFA is now well placed to execute its mine to market strategy, with commercial production planned to commence in 2020. We reiterate our Speculative Buy recommendation, now supported by a target price of 29.5p/sh.
Company Description
Shefa Yamim is an exploration and development company focused on coloured gemstones in northern Israel.
One Year Price Performance
Price % chg 1mn 3mn 12mn
-13.6 -17.4% -57.2%
SOURCE: FactSet, as of 3 June 2018 close.
Market: LSE
Shares in issue 167.4m
Free float: 99.7%
Major Shareholders:
Shefa Yamim LTD 40.6%
Eight O Eight Global Corp 5.87%
One Hundred and One Gold Hldgs LTD 4.03%
Oliver O’Donnell, CFA, Natural Resources
+44 (0)20 3617 5180 | [email protected]
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Technical Economic Evaluation Overview
Shefa Gems (Shefa Yamim) (SEFA LN) announced that in May 2019 it raised gross proceeds of £1m. This follows a
number of important milestones in H1 2019 including the publication of a Technical Economic Evaluation of the
operating and capital costs of the Kishon Mid Reach project, and Independent Valuation of the stones discovered to
date along with a landmark jewellery collection incorporating SEFA’s unique gemstones.
The Gembox Suite
SOURCE: Company data, VSA Capital Research.
The additional funding will be utilised for bulk sampling in Zones 2 and 3 as well as resource delineation in Zone 1,
furthering the mine to market strategy and cost that relate to securing the mining license. The license is currently
expected to be awarded in Q4 2019 with commercial mining currently planned to commence in 2020.
Overview Zone 1 and 2
SOURCE: Company data, VSA Capital Research.
The Technical Economic Evaluation (TEE) published in February 2019 demonstrated the potential for low capital and
operating costs at the Kishon Mid Reach project in Northern Israel. Although potential revenues were not assessed in
the report the current marketing strategy and use of SEFA gemstones by Yossi Harari in a landmark jewellery collection
will help to assess the realisable value of the stones and the mine to market strategy. However, a recently published
Independent Report has provided third party pricing for the stones of the Gembox suite. This has enabled us to
combine the datasets to produce a DCF analysis of the Kishon Mid Reach project demonstrating signi ficant upside
potential and strong cash flow generation potential. The second caveat important caveat to the TEE is that the report
has not accounted for existing equipment. SEFA invested in upgrading its sorting facilities post IPO to speed up bulk
sampling; this means that a 50tph facility already exists at the site in Akko and therefore upfront capital is significantly
reduced compared to that stated in the TEE. SEFA has spent US$36m to date on all aspects of exploration and plant
capital for the Kishon Mid reach project.
The key findings of the report are based on the assumption that the 1.5mt exploration target defined over zone one
supports a mine life of 11 years with just under a one-year construction period. The report has also considered an
owner operated model approach versus contract mining.
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• Operating costs of US$26/t which covers mining and processing under an owner operating model rise to US$27/t
under a contract mining schedule. Processing costs are the main operating expense hence the limited impact on
opex of the switching from owner operated to contract mining.
• The report not reflective of existing equipment indicates pre-production capital is US$11.3m and US$7.5m for
owner operated and contract mining respectively. This assumes using a small fleet for free digging and plant
capacity of around 50tph (500-700tpd) up from the current bulk sampling capacity of 50tpd.
The Kishon Mid Reach project is an alluvial gemstone project in Northern Israel where to date over 9,700ct have been
recovered from bulk sampling of the floodplain trapsites largely from Zone 1. A wide range of minerals, some of which
are unique to SEFA, have been recovered and include sapphire, ruby, Carmel Sapphire™, garnet, Natural Moissanite™,
spinel and hibonite as well as heavy minerals such as rutile, ilmenite and zircon where a small market exists for the use
of the stones as gems. These are known as the Gembox suite and are expected to be valued at up to US$10,000/ct
based on third party analysis.
View of Zone 1 of the Kizhon Mid Reach Project after Exploration Activity
SOURCE: VSA Capital Research.
The mining area is around 700m long with a buffer of 40m to the Kishon River; divided into three zones (mining, mined
and rehabilitation) to be mined in a phased approach before being rehabilitated while the two excavated areas will in
turn be used to hold pumped water whilst gravel extraction is taking place in the other. As can be seen , the alluvial
plain is used as farmland currently.
The mining method is expected to be conventional truck and shovel using road suitable trucks to take gravel to the
treatment plant site in Haifa where SEFA currently has a 50tpd facility; expanded from 30tpd following its 2017 IPO.
The overburden and gravel may be extracted via free digging with no drilling or blasting required, which is a substantial
factor in the low costs. Consequently, the plant design is likely to broadly similar to the beneficiation and sorting
flowsheet which currently exists. Given the simple mining and operating processes required to extract SEFA’s Gembox
suite this is indicative of why it is a low-cost project both in terms of capital and operating costs.
Capital Costs
The TEE has presented two scenarios for project development under contract mining and the owner operated model.
The respective project financing cost of each are US$7.5m and US$11.3m with an implied US$3.7m for mining
equipment costs. The treatment plant upgrade costs are assumed at around US$4.8m. Although we see this as a low
starting point in all cases the assumption is that new equipment would be purchased. However, given that SEFA
already has a 50tph processing facility we anticipate based on management guidance that around US$1m is necessary
to fully fund the start-up of mining.
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Although in both cases the pre-production capital is minimal for SEFA, the contract mining approach has significant
benefits to capital returns compared to the owner-operated model. By contract mining SEFA will lease the equipment
over the mine life paying a contract fee to the operator rather than owning the equipment outright. This increases
operating costs but only modestly. The substantial offsetting reduction in the upfront capital has a positive impact on
the project NPV and further reduces the required revenue to make the project viable. This approach appears to be
favourable from a capital return perspective.
We highlight that the TEE does not account for existing equipment and in order to progress its bulk sampling SEFA has
already invested in much of the relevant equipment. Management estimate that it would require just US$1m to reach
50tpd capacity given the equipment on site. We do, however, forecast sustaining capital requirements based on the
results of the TEE.
Operating Costs
The TEE findings indicate operating costs of US$26/t on an owner operated basis and US$27/t for a contract mining
basis. These costs are based on tonnes of ore (gravel) mined and reflect the combined mining and processing costs.
Mining costs on the owner operated basis account for around US$3.5/t and this is the reason that the switc h to a
contract model has only a modest inflationary impact on the overall unit cost. This is the main driver behind the
significant positive impact on potential capital returns under our preferred option of contract mining. Salaries and
power costs are the main additional factors underpinning opex.
The nature of alluvial mining and excavating floodplains which act as trapsites for gemstones is a simple process. The
operational costs are low which is typical of this type of mining. With no blasting or drilling required whatsoever this
minimises the cost of extraction meaning that costs are likely to be highly competitive compared to other alluvial
projects and naturally much lower than hard rock gemstone mining.
The base case scenario assumes an 11-year mine life and 1.5mnt gravel processed; our analysis focuses on the 1.1mnt
exploration target previously defined and on which bulk sampling to date has largely focused on. The TEE presents the
potential to increase the plant to 100tph from 50tph through an additional US$1m investment. This is due to latent
spare capacity in the smaller scale equipment meaning that the cost of expansion is minimal. However, we also not e
that this increase based only on the 1.1mnt exploration target would simply shorten the mine life to around four years.
The viability of this expansion would therefore, most likely be dependent on the bulk sampling ongoing at zone two
and latterly at zone three which could suitably extend the mine life and enhance the project NPV.
TEE Owner Operated Cost Profile TEE Contract Mining Cost Profile
SOURCE: Company data, VSA Capital Research.
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Mine to Market Strategy – Yossi Harrari & Independent Valuation
SEFA recently announced along with Yossi Harrari, a world-renowned jewellery designer, the launch of a landmark
collection of jewellery incorporating gemstones from the Kishon Mid Reach. The designer felt that the significance of
the gemstones being from Israel added a unique layer of marketing potential and value beyond that arising from the
natural quality of the stones. He expanded the range from 18 to 31 pieces in order to fully reflect the full potential of
the stones from the Kishon Mid Reach and has designed 11 necklaces, 10 rings, four pendants, four pairs of earrings
and two bracelets.
The pieces range in value from US$1,000-US$85,000 incorporating 24 Karat handmade gold and oxidised silver, known
as Gilver, as well as the rough SEFA gemstones. The collection incorporates a wide range of the Gembox suite
demonstrating that even the stones which investors are used to viewing as industrial minerals can be incorporated in
high value add jewellery. Indeed, the collection incorporates Natural Moissanite™, Carmel Sapphire™, black spinel,
ilmenite, garnet, sapphire, hibonite and ruby.
Yossi Harrari Heaven on Earth Collection
SOURCE: Shefa Yamim, Yossi Harrari.
This, in our view, is a major step in validating SEFA’s mine to market strategy and should provide investors with
confidence that the company can build a brand to maximise value from the Gembox suite of stones from the Kishon
Mid Reach. Although this particular announcement does not provide insight into the value of individual stones, as
pricing is for the pieces as a whole, it demonstrates the potential of this marketing strategy and its viability. Yossi
Harrari has marketing agreements with leading retailers such as Stanley Korshak and Harvey Nichols London along with
a deep following of celebrity endorsers and has a strong track record of selling high value pieces. We believe that this
platform will give SEFA a major advantage as it seeks to build a brand for its unique Gembox Suite, particularly the
Carmel Sapphire™.
The pricing announced as part of the Heaven on Earth collection ties in with the valuations indicated in the
Independent Valuation Report, published in March 2019. This valuation report was produced by a gemmologist, Dr
Gavrielov Gila, with over 40 years’ experience in the appraisal and purchase of stones including experience with well -
respected industry bodies such as Rapaport and the British Gemmological Institute.
This analysis is an important step for SEFA clearly indicating the significant value potential of its Carmel Sapphire ™ and
Natural Moissanite™, in particular, which are unique to the company and the Kishon Mid Reach project. These two
gem stones have no existing market, however, their appearance, rarity and local significance are all factors which have
positively influenced the valuation. The valuation report is, in our view, corroborated by the price range of the Heaven
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on Earth collection although clearly it is not possible in this case to isolate the valuations of individual stones from
within the jewellery pieces.
Independent Valuation Report Gembox Pricing
Shefa Yamim Gemstone Cut & polished price per carat (US$)
Natural Moissanite™ (rough and uncut) 10,000
Blue Carmel Sapphire™ (cabochon cut) 7,000
Black Carmel Sapphire™ (cabochon cut) 5,000
Hibonite 1,000
Sapphire 500
Ruby 500
Spinel 150
Ilmenite 105
Garnet 50
Zircon 100
CPX 45
Mix KIM's (garnet, ilmenite, spinel, CPX) 30
Rutile 25
SOURCE: Company Data, VSA Capital Research.
It is important to note that this valuation report across the stones is reflective specifically of the gemstones found at
the Kishon Mid Reach project and the valuer has assessed the stones discovered to date. We also highlight that the
distinguishing factors in terms of regional significance and uniqueness have been heavily influential factors in
gemstone valuations historically. However, in order to realise the full valuation potential SEFA will have to successfully
build a brand and market the unique stones. Given the management team’s deep experience of gemstone markets
they are well placed, in our view, to do so.
Yossi Harrari Heaven on Earth Collection Cabochon Cut Carmel Sapphire™
SOURCE: Shefa Yamim, Yossi Harrari.
Project Economics
Our analysis results in an NPV10 of US$331m for the Kishon Mid reach initial exploration target reflects the vertically
integrated mine to market model which seeks to fully benefit from the value uplift as stones progr esses through the
value chain. This valuation is driven primarily by the combination of low-cost mining and minimal pre-production
capital along with the unique array of gemstones whose rarity, regional significance and inherent gem quality are
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expected, based on independent opinion, to achieve significant valuations. Consequently, if these gemstone prices can
be realised the potential for SEFA is significant with strong margins and cashflow generation.
Alluvial mining is typically low-cost and the TEE has confirmed this from both an operating and capital cost perspective.
The net result from the low-cost figures is that in order to make the project profitable the minimum required carat
value is reasonably low, however, the valuations in the Independent Report which may be realised through the mine to
market strategy.
The difficulty with alluvial projects is that although costs are low the nature of deposition means that grade
distribution can vary significantly within a resource in an unpredictable fashion. This has a resulting impact on
revenues and margins. This is a drawback in our analysis which assumes a consistent grade over the life of mine and
therefore stable revenues. However, the risk is to both the upside and downside with the potential for finding highly
concentrated trapsites as well as sparse areas. Furthermore, the potential for exceptional finds to boost earnings
significantly is one of the particular attractions for investing in junior gemstone companies.
The TEE did not consider potential revenues and an NPV because insufficient testwork has been carried out to date on
the value of the stones within the Gembox suite. However, an independent report published in March 2019 has
provided guidance on potential valuations for gem quality examples of polished and cut stones within the SEFA
Gembox suite with the exception of the Carmel Sapphire™ where a valuation on a cabochon cut stone was provided. A
cabochon is a stone which has been polished but not faceted.
Using a combination of assumptions provided by the TEE and the independent valuation report we have produced a
DCF analysis which indicates the potential for strong cash flows and margins. All calculations are based on US dollar
values and we use a discount rate of 10%.
Gembox Suite Independent Valuation & Implied In-Situ Value
Shefa Yamim Gemstone Cut & polished price per carat (US$) Zone 1 Grade, cpht Value per tonne, US$
Natural Moissanite 10,000 0.1 1,000
Blue Carmel Sapphire™ (cabochon cut) 7,000 39.36 275,520
Black Carmel Sapphire™ (cabochon cut) 5,000 39.36 196,800
Hibonite 1,000 0.33 330
Sapphire 500 4.5 2,250
Ruby 500 0.08 40
Spinel 150 61.91 9,287
Ilmenite 105 12.06 1,266
Garnet 50 34.09 1,705
152.44 2,520
SOURCE: Company Data, VSA Capital Research.
Due to the fact that the Independent Valuation report largely reflects the value of cut and polished stones rather than
rough stones as is typical for a project of this nature we have made additional assumptions regarding the proportion of
gem quality stones within the resource, wastage during cutting and the terms of a JV with jewellery makers. Bain &
Company data with regard to diamonds indicates that around 50% of diamonds mined globally are industrial. No such
analysis has been produced as yet on the Kishon Mid Reach, however, we believe that this conservative est imate is
appropriate. During the cutting process, typically 50-60% of a stones weight is lost; we have a applied a factor of 0.5 to
all stones except for the Carmel Sapphire™ and Natural Moissanite™ which due to the cabochon nature of the former
will not be cut so harshly (we assume 0.6x value) and no change for Natural Moissanite™ which due to the sizes
discovered to date will be incorporated within jewellery as a rough stone.
The value-add process from mining to jewellery increases the value of stones by a multiple of their value in rough
form. Although industry margins decline on that rising value from mining to jewellery manufacture SEFA is uniquely
attempting to capture the full uplift through the value chain. In the case of Yossi Harari where SEFA has opted to work
with a brand name in order to help market the unique stones that SEFA has discovered some of that value is shared.
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We believe that as the SEFA brand is established for the Carmel Sapphire™ and Natural Moissanite™ SEFA will be able
to increasingly fully capture that value particularly when operating to produce its brand of jewellery . We assume over
the life of mine that SEFA may have to give up around 25% of the value as SEFA seeks to build its brand. Additionally,
we note that there may be longer time lags than a simple mining operation between mining and recording of revenues
given the jewellery design, making and distribution process. This would necessitate a higher working capital buffer
than a non-integrated strategy, in our view.
One other consideration which must be incorporated is the cost of the value-add process, primarily at the cutting
stage. Global data from Bain and Company indicates that US, European and Israeli cutting costs are typically
US$100/ct, while in China they fall to US$35/ct and US$25/ct in India although some estimates suggest that cutting
costs may be as low as US$10/ct. One of SEFA’s advantages are the strong local relationships which management have
in the local cutting industry which we anticipate would mean favourably cutting rates. Furthermore, the decision to cut
cabochons rather than fully faceted stones means that costs will be significantly lower than US$100/ct. Indeed, the
cost of cutting for the Yossi Harari collection was around US$15/ct according to management. With a mixture of lower
cost cabochon cutting, fully faceted cutting and SEFA’s local advantage we anticipate that cutting costs would be
between US$30-50/ct on average.
Consequently, we assume that 50% of the resource is non-gem quality and conservatively assume no value, between
40-50% of carat weight is lost during the cutting process and that SEFA receives 50% of the sale profits on the
jewellery. Despite these conservative assumptions we expect strong cashflow potential from SEFA and highlight that
our analysis focuses only on the initial zone one exploration target of 1.1mnt. Further exploration therefore has the
potential to enhance the project NPV which based on our assumptions stands at US$331m on the back of pre-
production capital of just US$1m.
Kishon Mid Reach Project Highlights
Basket Price, US$/ct 2,520 NPV, US$m 331
Cutting Cost, US$/ct 30-50 Discount rate, % 10
Average EBITDA, US$mpa 92 Pre-Production Capital, US$m 1.0
Average EBITDA margin, % 79 Sustaining Capital, US$mpa 0.07
Life of Mine 9 years Operating Unit Cost, US$/t 27
Grade, cpht 152 Plant throughput, ktpa 140
SOURCE: Company Data, VSA Capital Research.
One other significant benefit we factor into our analysis is that without a Mining License SEFA has been unable to sell
the inventory yielded in its bulk sampling. We are therefore able to factor the 9,733ct discovered in the Gembox suite
as an additional benefit to early revenue generation. This follows a nine-month construction period and we anticipate
production to commence in late 2020.
Alternative Valuation Approach; Minimum per Carat Value
Whilst our base case is firmly rooted in SEFA’s mine to market strategy most investors are perhaps more used to a
strategy of marketing rough stones. We have adapted our model to determine a breakeven NPV valuation and based
on a minimum per carat value necessary to generate the required revenue. Again, we use a 10% discount rate and our
model is in USD. However, in this scenario since we assume that all stones could be sold into industrial or gem markets
we make no assumptions for cutting wastage or resource gem quality.
Breakeven NPV Scenario Analysis, US$m
Grade Contract v Owner Operated NPV10
152cpht Contract Owner Operated Breakeven (US$0m NPV) IRR, 15%
Implied Minimum Required Value per Carat (US$/ct) 31 31 36 31 45
SOURCE: VSA Capital Research, Company data.
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Given the low capital costs and operating costs of US$26-27 per tonne we anticipate that in order for the project to
breakeven from an NPV perspective it would require average revenue of just US$31/ct. This valuation is based on our
assumption that SEFA would use the more attractive contract mining approach and that grade distribution would be in
line with the bulk sampling to date.
The implied required minimum carat value of cUS$31/ct is therefore more closely aligned with low quality non gem
grade pricing. Whilst the mine to market strategy demonstrates considerable upside we believe that this analysis
should highlight to investors a downside scenario. It is possible that SEFA could combine its strategies selling some
rough stones in the early stages of mining whilst it builds the jewellery brand in order to generate near term cashflow
and our analysis demonstrates that even low valuations for the stones make the project viable.
Using the base case scenario to determine the necessary value to generate a 15% IRR this would require an average
carat value of US$45/ct and results in an NPV of US$11m. Again, this is a per carat value consistent with low quali ty
stones and therefore a hurdle rate that could reasonably be achieved. However, the upside potential beyond this
remains significant given the propensity for alluvial projects to deliver large high value stones with transformative
results for profitability. Furthermore, additional exploration to extend the mine life could further enhance the project
potential.
Data from previous Gemfields auctions of rough rubies and emeralds indicate that non-gem or commercial quality
corundum is valued at up to US$20/ct. Medium quality rubies have been priced at between US$300-400/ct with high
quality stones fetching US$600-700/ct. Rubies typically achieve higher prices than sapphires although this provides
some indication of current market valuations of rough coloured stones. The latest data from the December 2018
Singapore auction of all grades of rubies had an average carat value of US$84/ct which was down 7% YoY and 30%
compared to June 2018. This does not, however, reflect the variation in quality within the sights a nd Gemfields
highlighted that per carat prices on a like for like basis remained supported.
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Exploration Upside
Our analysis is focused on the updated exploration target of 1.1mnt gravel in zone one where over 6kt of gravel has
been processed. Although zone two bulk samples have yielded results in line with those of zone one with a Gembox
suite grade of 97.98-242.69cpht dominated in this case by garnet and spinel. Further bulk sampling is planned for Q2
and Q3 2019 and consequently we intend to revisit our assumptions once the results are fully interpreted.
Success in zones two and latterly three would potentially justify the US$1m upgrade in plant capacity to 100t/hour that
would enhance mine life and potential cash flows. The total exploration target for zones one, two and three was
previously announced as 5mnt of precious tone bearing gravels. Just 1.1mnt is included in zone one and there is
therefore potential upside to our base case as successful bulk sampling indicates the potential to extend the mine life
beyond zone 1.
Zone Two Bulk Sampling Results to Date
Spin
el
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t
Ca
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l
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ire
Sap
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ire
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issanite
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ite
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ht
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e, ctp
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e, ctp
ht
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e, ctp
ht
cts
Grad
e, ctp
ht
cts
Grad
e, ctp
ht
cts
Grad
e, ctp
ht
Grad
e, ctp
ht
1223 691 330 47.8 191 27.6 25.8 3.7 40.8 5.9 0.08 0.01 0.14 0.02 - - 147 21.3 107
1224 553 276 49.9 123 22.2 23.0 4.2 21.9 3.9 0.04 0.01 0.04 0.01 1.0 0.2 93.3 16.9 97.98
1225 566 487 86.1 132 23.4 14.2 2.5 19.8 3.5 - - - - 1.5 0.3 82.0 14.5 131
1229 530 292 55.0 98.1 18.5 15.4 2.9 25.0 4.7 - - - - - - 92.9 17.5 99.48
1230 569 790 139 254 44.7 40.6 7.1 68.9 12.1 0.08 0.01 0.07 0.01 3.3 0.6 209 36.7 243
Total 2,909 2,175 74.8 798 27.4 119 4.1 176 6.1 0.20 0.01 0.25 0.01 5.7 0.2 624 21.4 135
SOURCE: Company Data, VSA Capital Research.
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Valuation
With the results of the Technical Economic Evaluation and Independent Valuation Report on the enabling us to
produce a DCF analysis of SEFA’s Kishon Mid Reach project we believe that it is now possible to quantitatively evaluate
SEFA and provide a target price to support our Speculative Buy recommendation. Our base case analysis utilises the
contract mining approach which requires a lower upfront funding requirement and more attractive cashflow profile
despite modestly higher opex of US$27/t versus US$26/t.
Our initial DCF analysis produces an unrisked valuation of US$331m using a discount rate of 10% and a weighted price
based on the grades achieved from bulk sampling. However, with further exploration, trial mining and project
financing yet to be resolved we have risked our valuation to more fairly reflect the current project risk. As project
milestones are achieved and the project is derisked we expect the stock to rerate to more fully reflect the value
potential.
Given that the TEE and valuation report were produced in USD we have applied the same approach for our analysis
using GBPUSD of 0.75 to convert. We believe that using a P/NPV multiple is the most appropriate method of reflecting
the risk. Given that a compliant resource has not yet been determined, financing remains outstanding and project
development is therefore at an early stage, a 0.20x multiple fairly reflects the risks whilst also indicating the current
significant upside potential in the shares.
Our assumptions extrapolate grade distribution achieved to date from bulk sampling, however, this does not fairly
reflect the potential grade distribution of an alluvial deposit which could be higher or lower than the results achieved
to date. Furthermore, it is not possible to reasonably predict the upside potential associated with extraordinary finds
which is a major reason for investing in junior gemstone producers. The largest stones discovered to date which
include Carmel Sapphire™ in excess of 30 carats would likely have a premium valuation if of gem quality which could
produce significant excess positive returns to earnings particularly given the low cost of extraction.
We also note the announcement of a 1 for 10 share split on 17 April 2019 from 14.24m shares to 142.36mn shares,
prior to the placing of £1m which took the outstanding shares to 167mn.
Shefa Yamim Valuation Methodology
NAV, US$m P/NAV, x Fair Equity Value
Kishon Mid Reach (Zone 1) 331 0.20 66
Total NAV, £mn 50
Consolidated Net Debt, £m (0.2)
Total Equity Value, £m 49
No. of shares, m 167
Target Price, GBp/sh. 29.5
Current Price, GBp/sh. 4.75
SOURCE: Company Data, VSA Capital Research.
We reiterate our Speculative Buy recommendation although have now determined a target price of 29.5p/sh.
12
Peer Group Comparison
Given the lack of listed coloured gemstone miners and developers, SEFA continues not to have a natural peer group.
Highlighted by a 37% and 19% fall in Q1 2019 revenue for Alrosa (ALRS RU) and De Beers the soft diamond market is
having a negative impact on the comparable stocks made up of alluvial diamond peers and this may have impacted
sentiment towards SEFA. However, coloured gemstone pricing continues to be robust as evidenced by the Gemval
Index and the long-term uptrend in pricing continues highlighting the potential opportunity in SEFA as exposure to the
market.
Coloured Gemstones Continue to Outperform Diamonds
SOURCE: Gemval, VSA Capital Research.
Robust pricing along with the low-cost extraction potential demonstrated by the TEE underpins our investment case.
The low operating and capital costs minimise the required value of discovered gemstones necessary to generate
profitability while the potential for exceptional finds could quickly add significant upside to the value of the operations.
Peer Group Comparison
Company Name Ticker Market Cap, US$m
Market Cap, £m
12 month performance, % Location Company Description
Olivut Resources OLV CN 5.58 3.91 +21.1 Canada Early stage, primary source explorer of kimberlite pipes in Northwest Territory
Botswana Diamond
BOD LN 5.15
3.60 -41.9 Botswana, South Africa
Early stage JV with Alrosa; completed rock sampling, mapping and geophysics. Recently acquired earn in rights on advanced exploration assets in South Africa
Tsodilo Resources TSD CN 6.09 4.26 -70.9 Botswana, South Africa
Exploration of various kimberlite and precious metals assets.
Batla Minerals MLBAT EN
3.39 2.37 -58.3 Lesotho, South Africa
Alluvial diamond production, contract mining and mine development.
Diamcor Mining DMI CN 8.58 6.01 -60.9 South Africa Currently developing an alluvial diamond project with a 1.3mnct resource.
Trans Hex Group TSX SJ 4.50 3.15 -65.3 South Africa 30+ year track record of alluvial diamond production
Richland Resources
RLD LN 0.68 0.48 -73.0 Australia Sapphire producer. c900kct production in 2015 of all qualities
Fura Gems FURA CN 19.85 13.90 -56.3 Colombia & Mozambique
Ruby and Emerald exploration and production. Former Gemfields Coscuez mine January 2018.
Gemfields GML SJ 175.87 123.11 -35.3 Mozambique Ruby & emerald producer, market leader
Shefa Yamim SEFA LON 11.38 7.95 -57.2 Israel Advancing to Trial Mining in 2019
SOURCE: Factset, Company data, VSA Capital Research. NOTE: USDGBP 0.74, USDCAD 1.28, GBPCAD 1.69 GBPNIS 4.64
100
120
140
160
180
200
220
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Gemval Aggregate
Diamond SE
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Shefa Yamim continues rightly, in our view, to trade at a premium to the comparable peers, however, its own
performance has been weak in recent months. We believe that the publication of the TEE should demonstrate the
projects potential in large part whilst the ongoing divergence in gemstone pricing highlights the investment
opportunity. However, we note that Fura Gems (FURA CN) which is acquiring New Energy Minerals (NXE AU)
(formerly Mustang Resources) via an earn in agreement into its Mozambican ruby assets, has now raised C$35m since
listing although it has announced that it requires an additional similar amount to achieve its milestones. The valuation
of A$2.8m-A$9.99m for the transaction highlights the wide variation in valuations in the peer group and the inherent
challenges in valuing this type of asset. However, FURA’s performance has also been broadly range bound. The results
of the TEE and independent valuation report demonstrate the potential viability of the project and SEFA continues to
work towards trial mining in 2019. The results of the TEE are a key milestone necessary for th at.
Risks
• Commodity Prices. The company is primarily exposed to the coloured gemstone market and unexpected changes
to pricing may affect our valuation. Prices are dependent on the unique characteristics of individual stones.
• Financing Risk. Given the challenging conditions for commodity markets and natural resources companies there is
a risk of Shefa Yamim failing to secure project financing. This has been reduced by the latest round of funding.
• Development Risk. The potential for delays and operating issues are an inherent industry risk and there is the
potential for delays to the licensing and construction of the project. The project is located close to residential
areas and transport links, management will need to address the potential impact and possible solu tions as part of
its social and environmental impact studies.
• Geological Risk. Further geological assessment is required to ascertain commercial viability; there is of course a
risk that this is not established.
• Marketing Risk. The valuation of individual stones presents a future risk to the potential valuation and profitability of Shefa Yamim.
14
Appendix 3: Financial Statements
Profit & Loss, NIS’000
2018 2017
Costs and expenses General and administrative expenses - 3,410 - 541
Capital gain - -
Operating loss - 3,410 - 541
Financial expenses - 218 - 15,954
Financial income 9,637 237
Net financial Expense 9,419 - 15,717
Loss for the year and comprehensive loss attributed to the Company shareholders 6,009 - 16,258
Basic and diluted loss per share (in NIS) attributed to the Company shareholders 0.4 - 1.7
SOURCE: Company data, VSA Capital Research.
15
Balance Sheet, NIS’000
2018 2017
Non-Current Assets
Fixed assets 1,736 2,130
Loan to the parent company 2,494 2,342
interested party 77 77
Assets for exploration and evaluation of precious stones 59,128 55,259
Total non-current assets 63,435 59,808
Current Assets Cash and cash equivalents 209 6,489
Deposit in bank - 173
Receivables 779 368
Total current assets 988 7,030
Total Assets 64,423 66,838
Liabilities and shareholders' equity
Non-current Liabilities:
Long-term loans from interested parties and others 560 800
Financial leasing - 49
Liability for severance pay 138 118
Warrants 564 9,834
Total long-term liabilities 1,262 10,801
Current Liabilities: Short-term loans from bank and others 456 467
trade payables 1,368 1,766
Other accounts payable 114 110
Interested parties 907 1,206
Loans convertible to shares 772 -
Total Current Liabilities 3,617 3,549
Total Liabilities 64,423 14,350
Shareholders’ Equity 59,544 52,488
Total Liabilities and Shareholders' Equity 123,967 66,838
SOURCE: Company data, VSA Capital Research.
16
Cash Flow Statement, NIS’000
2018 2017
Cash flows from operating activities:
Loss for the year 6,009 - 16,528
Adjustments required to reconcile loss for the year to net cash used in operating activities - 9,931 17,114
Net cash used in (provided by) operating activities - 3,922 856
Cash flows from investing activities:
Purchase of fixed assets - 391 - 531
Consideration from sale of fixed assets 55 -
Deposits 173 -
Investment in exploration and evaluation assets - 3,541 - 4,375
Decrease in deposit - 84 - 1,177
Loan rendered to parent company - 188
Net cash used in investing activities - 3,788 5,895
Cash flows from financing activities:
Consideration received for issuance of share capital (including additional capital) 908 137
Increase in deferred issuance expenses - - 4,707
Repayment of credits from banks and others, net - 2 - 205
Receipt (Repayment) of loans from interested parties, net - 111 446
Receipt of loans convertible to shares 685 16,611
Receipt of long-term loans - -
Repayment of long-term loans - 25 - 40
Interest received, net - 106 - 458
Net cash provided by financing activities 1,349 11,784
Linkage differences in regard to cash and cash equivalents 81 - 257
Increase in cash and cash equivalents 6,280 6,488
Cash and cash equivalents at the beginning of the year 6,489 1
Cash and cash equivalents at the end of the year 209 6,489
SOURCE: Company data, VSA Capital Research.
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Disclaimer
Investment Analyst Certification
In our roles as Research Analysts for VSA Capital Limited, we hereby certify that the views about the companies and their securities discussed in this report are accurately expressed and that we have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report.
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Important Disclosures
This research report has been prepared by VSA Capital Limited, which is party to an agreement to be paid a fee as corporate finance advisors and arrangers with, or has provided investment banking services to, Shefa Yamim, or has been party to such an agreement within the last twelve months, and is solely for, and directed at, persons who are Professional Clients as defined under Annex II of the Markets in Financial Instruments Directive, Directive 2004/39/EC, or as defined in the FCA Handbook. Persons who do not fall within the above category should return this research report to VSA Capital Limited, New Liverpool House, 15-17 Eldon Street, London EC2M 7LD, immediately.
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VSA Capital Limited uses the following stock rating system to describe its equity recommendations. Investors should carefully read the definitions of all ratings used in each research report. In addition, since the research report contains more complete information concerning the analyst’s views, investors should carefully read the entire research report and not infer its contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor’s decision to buy or sell a stock or investment fund should depend on individual circumstances and other considerations.
VSA Capital Limited’s recommendations are defined as follows:
BUY: The stock is expected to increase by in excess of 10% in absolute terms over the next twelve months. HOLD: The price of the stock is expected to move in a range between -10% and +10% in absolute terms over the next twelve months. SELL: The stock is expected to decrease by in excess of 10% in absolute terms over the next twelve months.
In addition, on occasion, if the stock has the potential to increase by in excess of 10%, but on qualitative grounds rather than quantitative, a SPECULATIVE BUY may be used.
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Distribution of VSA Capital Limited’s Equities Recommendations
VSA Capital Limited must disclose in each research report the percentage of all securities rated by the member to which the member would assign a “BUY”, “HOLD, or “SELL” rating, and also the proportion of relevant investments in each category issued by the issuers to which the firm supplied investment banking services during the previous twelve months. The said ratings are updated on a quarterly basis.
Equities breakdown: 31 December 2018 Spec. BUY BUY HOLD SELL
Overall equities coverage 33.3% 66.7% 0.0% 0.0%
Companies to which VSA has supplied investment banking services 33.3% 66.7% 0.0% 0.0%
Recommendation and Target Price History
Valuation basis
Our valuation is based on a risked DCF analysis.
Risks to that valuation
The company is subject to commodity price risk, financing risk, development risk, geological risk and marketing risk.
This recommendation was first published at 12/05/18.